Market Imperfection: Credit Rationing and Excess Liquidity

This article seeks to understand how the monetary policy facilitates credit channels such as credit growth, credit creation and investment spreads. A major task is tackling asymmetric information in credit markets. A decline in wealth transfer from the lender to the borrower which raises the adverse selection problem, thus leads to decreased lending and finance investment spending. The simulation with two representative countries provides us with detailed evidence on savings and investment expressing supply and demand of loanable funds at the economic level; but this is largely ignored in the conventional macroeconomic analysis: e.g. in the Arrow-Debreu model, firms can fund all projects on a pay-as-you-go basis. Further investigation will be conducted for the lender as the principal how to face a low interest rate environment. JEL classification: E22, E32, E5